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Cyprus VAT Private Aircraft Scheme

 

Three years since the effective launch of the Cyprus VAT Yacht Leasing Scheme, the Cyprus Tax Department has recently introduced the Cyprus VAT Private Aircraft Scheme (CPAS), which refers to the leasing of aircraft for private purposes. The Scheme has sparked worldwide interest in Cyprus, with the possibility of lowering VAT rates to as low as 4.37%.

A Private Aircraft Leasing Agreement is considered a supply of services for VAT purposes and is taxable at the standard rate of VAT of 19%, with reference to the use of the aircraft within the European Union airspace. It enables the lessor (owner of the aircraft) to contract the use of the aircraft to a third party, the lessee (the person who leases the aircraft) in return for a consideration. Upon the completion of the lease period, the lessee may exercise the option to purchase the aircraft at an additional consideration.

Under the CPAS, only a percentage of the lease value will be subject to Cyprus’ standard VAT rate of 19%. Since it is practically impossible to establish the amount of time that an aircraft spends within the EU’s airspace, the Tax Department has determined that the the effective rate of VAT applicable, is calculated based on the percentage of the time the aircraft is deemed to fly within the EU airspace and based on the type of aircraft involved e.g. Piston, Turbo, Jet and the maximum take-off weight, enabling the effective rate of VAT to be reduced to as low as only 4.37%.

The following table determines the percentage of lease which is subject to VAT as well as the effective VAT rates of each type of aircraft:

A/A TYPE WEIGHT (MAX TAKE OFF WEIGHT) PERCENTAGE USE WITHIN EU VAT CALCULATIONS
1 PISTON Light: 1KG–3,000KG
Small: 3,001KG-5,700KG
Medium: 5,701KG-15,000KG
Large: Over 15,001KG
100%
80%
60%
40%

 

100% of consideration x 19%
80% of consideration x 19%
60% of consideration x 19%
40% of consideration x 19%
2 TURBO Light: 1KG–3,000KG
Small: 3,001KG-5,700KG
Medium: 5,701KG-15,000KG
Large: Over 15,001KG
55%
45%
35%
25%

 

55% of consideration x 19%
45% of consideration x 19%
35% of consideration x 19%
25% of consideration x 19%
3 JET Light: 1KG–3,000KG
Small: 3,001KG-5,700KG
Medium: 5,701KG-15,000KG
Large: Over 15,001KG
50%
40%
30%
20%

 

50% of consideration x 19%
40% of consideration x 19%
30% of consideration x 19%
20% of consideration x 19%

Irrespective of the above VAT guide, if any private aircraft is used entirely and exclusively within  Cypriot airspace, the leasing is subject to VAT under the standard rate of 19%.

Important conditions that should be taken into account while considering the effective use of the Scheme include the following:

  • The aircraft must fly in Cyprus within two months of the date of inception of the lease agreement. Any postponement to the above can be granted only by the Commissioner of Taxation. The delay in any case cannot exceed the lease period whereby the right of purchase can be exercised.
  • The lease agreement shall be between a Cyprus resident company, registered for VAT in Cyprus, and any physical or legal person established or residing in Cyprus, or having his place of residency in Cyprus - not being involved in any economic activity. It should be noted that full anonymity and confidentiality can be preserved through corporate structures.
  • The initial lease fee should be at least 40% of the value of the aircraft.
  • Lease payments should be payable on a monthly basis, along with the applicable VAT based on the rates described above.
  • The lease period should not be for less than 3 months (91 days), and cannot exceed 60 months.
  • The aircraft may be purchased outright by the lessee at the end of the lease period. The final payment should not be less than 2.5% of the initial value of the aircraft. Such final payment is subject to VAT at the standard rate of 19%.
  • The purchase will be confirmed by the Tax Department in the form of a certificate, stating the total VAT liability.
  • The profit from the lease agreement derived by the lessor should not be less than 5% of the initial value of the aircraft. 
  • At the time of commencement of the lease agreement, the total of lease payments that are taken into consideration for calculation of the total VAT payable should be increased by 50% of the profit i.e. 2.5%.
  • The private aircraft may be registered under any register in the world and not necessarily under the Cyprus aircraft register.
  • On entering into the Scheme, the Tax Department will issue a Provisional VAT paid Certificate. In the case where the lessee exercises the option to buy the aircraft at the end of the lease period, the Tax Department will issue a certificate to the lessee confirming full payment of the total VAT liability, provided that the VAT liability has been paid in full.
  • When the VAT on the balloon amount is paid (40% of the value), the lessor may custom clear the aircraft in Cyprus and the Customs Director will issue a T2L Certificate. In the case where the lessor-owner does not pay any VAT on the monthly lease payments, import VAT will be demanded by the Customs Director.
  • Finally, it should be noted the following leases also qualify under the CPAS:
  • Leases assigned from another EU lessor company to a Cyprus company which will be acting as the lessor for an aircraft being leased to a Cyprus lessee.
  • Leases where the Cyprus company acts as a sub lessor of an aircraft being leased to a lessee established in Cyprus.

The procedures taken for the approval of the Scheme are summarised as follows:

  1. The written approval of the Commissioner of Taxation must be obtained in advance, confirming the value of the aircraft and the applicable amounts on which VAT will be levied according to the extent of its use within EU airspace. The application must also be accompanied with certificates designating the value of the aircraft, for example, from a registered independent valuer of a competent state and/or other evidences such as invoices, insurance certificate stating the insured value, financier’s valuation etc. as well as the lease agreement entered into by the parties.

    For new aircraft, the original or certified purchase invoice and the original or certified purchase agreement must be provided. For used aircraft, a recent independent valuation from a registered independent valuer as well as the original purchasing invoices and/or agreements must be provided.

  2. Registration of Cyprus Limited Liability Company (CypCo). A registration of a second Cyprus company may be required;
  3. CypCo will apply for VAT registration;
  4. CypCo and Lessee enter into an aircraft lease agreement;
  5. Lease agreement and the following supporting documentation must be submitted to the Tax Department:
    1. Noise certificate;
    2. Type certificate (manufacturer);
    3. Certificate of Airworthiness, (CofA);
    4. Airworthiness Review Certificate, (ARC).
  6. Upon review of the written request, the Tax Department will issue a letter of approval confirming the applicable rate of VAT.

To illustrate the above mechanics of the Scheme, the following is a numerical example depicting the VAT and Corporate Income Tax arising from the aircraft registration and CPAS:

Example: 

  • A jet aircraft with an initial value of €60,000,000;
  • The aircraft has max take-off weight of 16,000 kg;
  • Lease agreement duration of 60 months, being the maximum allowable under the VAT scheme;
  • As at the date of commencement of the lease agreement, the lessee (CypCo) will pay 40% of the value of the aircraft, namely €24,000,000 (i.e. 40% of €60,000,000), with the balance of €36,000,000 being payable over 59 months;
  • Purchase option value will be 2.5% of initial value, hence €1,500,000;
  • Taking into account that a 5% profit margin must be maintained for Corporate Income Tax purposes, expected profit of €3,000,000 will arise;
  • The applicable rate of VAT, which is based on the engine type and maximum take-off weight, will be 3.8% (i.e. 20% of the standard rate of 19%).

VAT due on CPAS:

DESCRIPTION

AMOUNT IN EUR (€)

VAT due upon payment of the 40% (i.e. €24,000,000 (A)

€912,000 (€24,000,000 * 3.8%)

VAT due upon payment of purchase of the aircraft at end of lease period for €1,500,000 (B)

€285,000 (€1,500,000 * 19%)

Balance to be paid on initial, up to and including the final installment (i.e. 59 installments if you exclude the first installment where down payment is made)

€37,500,000 (€60,000,000 + €1,500,000 - €24,000,000)

Total VAT due on all regular monthly installments (C)

€1,425,000 (€37,500,000 * 3.8%)

TOTAL VAT DUE ON LEASE SCHEME (A + B+ C)

€2,622,000

Effective VAT rate

4.37%

VAT due for an aircraft not using the Scheme

Private use outside the scheme

100%

Outside the scheme liability

€11,400,000 (€60,000,000 * 19%)

Under the scheme liability

€2,622,000

Benefit

€8,778,000

Corporate Income Tax Due on CPAS

CypCo, being the lessor, is a Cyprus company, which if a tax resident, is subject to Corporate Income Tax (CIT) at the flat rate of 12.5%. Although in theory the CypCo can also be a non resident Cyprus company (i.e. company whereby management and control is not exercised in Cyprus) and thus not subject to Cyprus tax - we do not advise this due to foreign tax implications that may arise.

Following the numerical example above, the CypCo, if a tax resident in Cyprus, would be subject to 12.5% CIT on the €3,000,000 profit that would ensue during the life of the lease agreement, hence €375,000 in tax. (Any interest expense and all administration expenses such as accounting, audit etc. will be disallowed for tax purposes for maintaining the 5% profit margin).

The effective VAT and tax rate, combined, is 5% as per the numerical example above.

How we can assist

Savva & Associates and our team of VAT experts can assist you with the full implementation of the CPAS, substantially decreasing your VAT exposure upon purchase of a private aircraft within the EU. Our services extend to setting up and the ongoing administration of the appropriate aircraft-owning company in Cyprus, aircraft registration, and undertaking all necessary tax and legal arrangements and procedures on your behalf.

For more information regarding the CPAS, please contact Charles Savva at +357 22 516 671, or by email c.savva@savvacyprus.com.

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